ROP-Death Benefit-Mortality risk

[vikky]

The notes say that mortality risk for a return of premium death is significant especially at the start of the contract.

If the benefit payable is return of premium at the start of the policy we would have hardly received any premiums so death benefit would be really low for ROP benefit...Not sure what am I missing here

 

[morrisja]

Assuming it's a monthly RP contract and the life assured dies after paying one premium we have the following cashflows:

In:
- 1 months premium
- Investment return (though it's insignificant for 1 premium over 1 month0

Out:
- Initial expenses
- Initial Commission (no clawback on death)
- 1 months premium
- Termination expenses

Take 1 months premium out of both sides and you're left with large initial set up costs (expenses and commission).. also termination costs though these are not likely to be as significant.

You can roll this forward for a few months but the same logic applies. It's not until the investment return becomes a significant item that mortality risk decreases. The situation differs for SP policies obviously and to a lesser extent premiums payable less frequently than monthly.

 

[vikky]

Thanks for the reply Morrisja..I understand what you are saying from a strain perspective..However the part of the notes that I refer to is talking about mortality risks for endowment assurance contracts..the paragraph for core reading just before this states that for a death benefit equal to the maturity benefit for a endowment assurance contract the mortaltiy risk is high at the earlier stages and goes down as policy attains maturity.This made sense to me..However when it talks about a ROP death benefit in the next line it says The notes say that mortality risk for a return of premium death is significant especially at the start of the contract...Help

 

[morrisja]

What part of the notes are you referring to? Looking back at my notes my answer would stay the same..

Chapter 1 refers to endowment assurance products and states that a return of premiums/fund has insignificant mortality risk except near the start of the contract. Possibly this has been rewritten.. or you're referring to a different part of the notes.

Mortality risk arises in this case because asset share is negative in the early months but the payout on death is positive.


Possibly there's something I'm missing or not understanding in your question..